Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for November 30th, 2009

One week after intervening the four banks related to Ricardo Fernandez Barrueco with open doors, the Venezuelan Government surprised everyone by announcing that it would continue the intervention under closed doors and that two of the banks, BanPro and Canarias, would be liquidated and the other two, bolivar Banco and Confederado, would be “refloated” in the near future.

The decision, as well as the way it was handled, shows a high level of uncertainty on the part of the Chavez administration on how to handle the crisis, which was caused by the lax supervision of the authorities and Chavez’ backing of the main actors of this sorry episode.

The day began with an improvised press conference by the Minister of Finance announcing the measure, with few details given out, other than the banks would not open and that there would be differential treatment given to them.

This was easier said that done, as the shut down and the lack of details created panic among depositors who did not know what would happen to their savings. According to Venezuelan law, the Depositors Guarantee Fund has to pay up to Bs. 10,000 per account (US$ 4,651) up to 21 days after the intervention, but even this simple information was not communicated in the early press conference, confusing and scaring depositors.

And most of what followed in a string of press conferences was not much better, as information was mixed and the Government clearly realized that it had a real financial crisis in its hands as well as a public relations disaster that it had to address.

But having multiple spokesmen (and bad ones at that!) at each press conference (all broadcast live, of course) did not ease tensions or clarify much.

The truth is that in our opinion, the Government has been acting hastily on this matter. Independent of the reasons why Fernandez’ financial empire was intervened (Chavez has claimed HE ordered the intervention) the original decision to intervene all four and leave them open, still seems to be the correct one. By shutting them down today, panic was created and it is unlikely that any of the banks will ever be floated again.

One would have thought that someone in the Government would recall the 1994 financial crisis, when interventions shutting down the banks did not work, and it was only when interventions were done without shutting down banks or migrating deposits to other financial institutions that the crisis eased.

What happened at the time was that as the Government began shutting down banks, people began speculating who would be next in the process and begin withdrawing their money from what they perceived to be the weakest banks. Some banks which were not strong, but did not have to go under, did fold and it was not until intervened banks were kept open that things calmed down (Even if the currency devalued a factor of almost three in a few months in the process)

Tonight, in yet another press conference it got a bit more confusing, as the Superintendent of Banks said that accounts from the banks to be liquidated would be migrated to Banco de Venezuela, which is not what the law says. In fact, this would have been a cleaner solution, to have announced a week ago that all accounts would be migrated to Banco de Venezuela and the four intervened banks would be no more.

Because after Chavez said on Sunday that he is ready to nationalize the banking system, it seems hard to believe that anyone, absolutely anyone, would be interested in buying the banks that the Government wants to “refloat” The bank buying bubble in Venezuela is over, four to five times book is no longer a possibility, as it should be. Look for book value to be “fair” for a while.

And the Government wants people to believe that this was a problem of capitalism. But this is a problem of XXIst. Century Socialism, Protectionism and lack of supervision which is why I have been calling all of these guys the “robolution” for quite a while.

Because none of these robolutionaty bankers meant to make money the capitalistic way. They meant to make money by playing the most savage financial engineering in the world. There is even a new verb for it in Venezuela, you buy a bank “para ahuecarlo” to make a hole in it. That is the true reason these four banks are worthless, they were “holed’ really badly only because there was no supervision and Fernandez Barrueco had protection from a very high authority: Hugo Chavez Frias.

In June and July of last year, I wrote a few posts on the structured notes, which was how these noveau bankers began holing Bolivar, Confederado and Banpro. Like all bubbles, you knew they were there, but you did not know when they would explode. The Government decided to protect its own, prolonging the explosion of the bubble. It is my belief that we have only seen the very beginnings of it.

Because while these banks were “small” and some of the irresponsible Chavistas, like former Minister Cabezas, have made a point of this, these four banks are not the only ones that are worthless and the handling or mishandling of the crisis is not going to help the process.

And not only are other banks going to fall, but broker U21, fully owned by Banco Canarias and fully “holed” by the robolutionaries, is also insolvent via the shenanigans of the robolution in ways we will only find out about in the next few days. Thousands of investors are soon going to find out that their investments are worthless. Sadly, U21 was created originally to service the battered Venezuelan academic community, this long forgotten ideal only exists in the memory of those that witnessed it being decimated by the robolution. Sadly,as U21 falls, other brokers with loans and deposits with it, will also be hurt.

Like all financial crisis, we all know where this one began, but no one, absolutely no one, can tell us where it will end.

Least of all, those that today tried to cover up their ignorance by repeatedly addressing the country.